Getting rid of income, tax payroll tax and replace with sales tax?

[savemefromdumbya]

I heard a lecture recently - Prof Kotlikoff put forward some ideas that income tax and all other fed taxes should be scrapped and replaced with a 30% sales tax. He said it would make the rich spend. This he siad would contribute to bridging the country's debt. How would this work? Any economists here - ideas?

http://mitworld.mit.edu/video/202/

[ayeshahaqqiqa]

1. It is a regressive tax idea

because the poor will spend almost all their income on the basics and be taxed out the wazoo for food, medicine, clothes, etc. Using this scheme money made by stocks and bonds, the main way the rich get richer, remain untaxed. They'll be saving so much by not having to pay dividends taxes they won't mind paying extra for their third Mercedes.

[indepat]

15. Yes, an extremely regressive tax scheme, but that's what 'Pukes are best

at, the heart and soul of their extreme RW ideology.

[BigMcLargehuge]

57. beat me to it by a day and a half

it's regressive, very regressive.

[TheFarseer]

2. Make the rich spend?!?!?!?!

How the fuck would it do that?? Since when do you encourage something by putting a tax on it? I suppose the extra sales tax on cigarettes is to encourage people to smoke?!?! I feel his proposal would lead to stockpiling money and blackmarkets to avoid the sales tax. Also, it would result in a much higher sales tax than 30% or else drastic cuts to the budget.

[porphyrian]

13. The idea is that the rich don't pay income tax...

...because they don't have an income - they're already rich. Thus, their money just sits around in tax shelters and they live off of the interest, virtually tax-free. The sales tax idea would be great if it didn't punish the poor. Maybe staples such as food, housing and utilities should be without tax, but everything else be taxed heavily. In reality, though, this would probably just create a giant black market for non-essential commodities, and the rich would just get their luxuries overseas where they wouldn't have to pay as much.

[Silverhair]

24. They would still have to pay taxes when they brought it into the States.

And foriegn countries charge taxes too.

[ElaineinIN]

27. Actually, much of it is taxable even off shore

as US persons are taxed on their world wide income. We lawyers like to call not reporting that income as "tax fraud."

[TheFarseer]

38. Then tax dividends and capital gains

like they should be taxed at the marginal tax rate. I don't know what tax shelters we're talking about - people incorporating to hide income, off-shore accounts, or something I haven't even thought of but you can probably do something about that if there was any political will. Of course, that's the problem, isn't it?

[Johonny]

3. How would it make them spend?

I sure would make out great with such a thing.

[RobertSeattle]

4. The complexity is in the transition

(Don't have time to watch the video)

You can't just switch from an income tax to a sales tax - it would take probably a generation+ to make the transition. Change to a sales tax would be very unfair to those who actually did what the government has been asking them to do - saving their after tax money - and then apply to a sales tax on already taxed dollars.

[HereSince1628]

5. The wetdream of the investor class...it totally frees them from

paying taxes on everything that has no direct benefit to themselves.

[papau]

11. LOL - you're exactly correct - the Lux Tax of the 90's found Rich buy

overseas just to avoid tax - so they repealed the luxury Tax.

This is a joke.

90% of the income of the rich is capital gains and investments - and this ends any taxation on that income.

FORCE THE RICH TO SPEND? - what a joke

Better would be an annual asset tax with a $1 million dollar deduction.

Better would be a "flat 30%" tax with per person and per return deductibles plus small limited charity and home interest deductions so as to make it progressive.

[dcfirefighter]

18. Luxury tax put craftsmen out of work

building boats in NC for one thing.

[papau]

23. Exactly - those that buy lux can afford transport cost needed to avoid tax

A sales tax has got to be the rich wet dream - and indeed that is what they have in Bush's Texas.

The Texas joke is that a sales tax allows the poor to "budget" for taxes and if they are paying more than was budgeted for taxes they can stop buying/renting and thereby cut their tax bill.

I kid you not.

A major State figure said that to me.

God - we need better education in this country.

:-(

[Mass]

6. Sales tax is one of the most regressive taxes that exist.

Sure, a tax on spending will make the rich spend. Not exactly the most logical argument that exists.

Actually, rich people spend the same whatever their tax is. This is just not a factor. Eventually, they may buy a new yacht if you give them more tax cuts on yachts, but that is about all.

However, poor and middle-class people are very affected by these types of taxes because it will directly impact their daily lives.

Sales taxes are the most regressive taxes that exist because, whether you earn minimum wages or $ 1,000,000 a year, you still need to eat, have a roof, and have clothes.

[dcfirefighter]

7. It's seductive

and not entirely evil, but in general, it would mean that those who HAVE would keep what they've got, while those who HAVE NOT will have to pay taxes on what they buy.

A sales tax is an indirect tax on:
WAGES, by decreasing the demand for goods and services and
productive INVESTMENT, again by decreasing the demand for goods and services

The idea of a CONSUMPTION tax v taxes on PRODUCTION has merit, however sales taxes on services and manufactured goods are taxes on production as well.

If you wanted to ball up all the other taxes and replace them with one tax, as a progressive / green / 'l'ibertarian, you'd like a tax on LAND. (Which covers all of the natural world: land values, pollution, radio spectrum, resource extraction, etc.)

[kenny blankenship]

8. Breathtakingly stupid and antidemocratic idea

Since what he proposes is the dictatorship of the wealthy, why not just reinstitute slavery and have done with it?

[OneBlueSky]

9. bad idea that's been around forever . . . what we need is . . .

a return to progressive taxation, not the most regressive tax imaginable . . .

[meow2u3]

10. Sales taxes are poverty taxes

Also known as misery taxes designed to keep in misery everybody except the superrich. Bad idea.

[sendero]

12. It would work as well as other...

... tax cuts for the rich in an economy that is awash in investment cash but short on consumers who can buy.

That is to say, not well at all.

[bluedawg12]

14. Just an American here, but logically this is means that

that a person with $100.000 annual income who theoretically spends $10,000/year on food pays $3,000 additionally for tax.

A person who makes $30,000 annually and spends the same $10,000/year on food also pays $3,000 additionally for taxes.

Now, who feels that $3,000 more, the person who makes 30 g's/year or the guy who makes 100G's/year?

Unless food, heating utilities, gasoline, and other of life's neccessaties were tax exempt, a 30% sales tax, in this non-economist humble dog's opinion, would be devastating to people with a lower income than the rich.

Plus, the rich would not spend more or less than they do now, if you are really rich you don't worry about "buying" or not, you worry about investing your capitol wisely, not about mundane things like cars, McMansions, yachts and so forth.

Just my 2 kibbles worth.

[TahitiNut]

16. Start by putting a tax on the sale/exchange of corporate stock ...

... and then we can talk. Let 'em start with a mere 2% sales tax. (After all, it's property.)

[tx_dem41]

17. Not only would this be a hugely regressive tax, but...

most economists when they do the numbers on this say the percentage would have to be more like 50% to up to 100% sales tax to match current revenue.

[Norquist Nemesis]

19. Well, there's this loaf of bread

that every family buys at the store each week. One family makes $10 a day, and a second family makes $50 a day. The loaf of bread costs $2.50. Total including 30% tax is $3.25.

For the first family, that loaf of bread totals 32.5% of their income. For the second family, it equals 6.5% of their income. Who has the higher tax burden?

[Silverhair]

20. Depends on how it is set up.

The current plan in congress sucks as it is horribly complex. However, it could be a great idea, if done right.

The problem is NOT in a person being rich, it is then LIVING rich. If a rich person makes lots of money but lives moderately, then their excess production is loaned to the economy in general by way of savings which creates loan capital that helps the economy. They don't actually use that much resources for themselves. I am completely willing to let that person be as productive as they can be. Such a person would have a modest tax burden.

But a person who LIVES rich uses up more resources. That person would be taxed more.

To help the poor, there would need to be certain reasonable exemptions. In Texas, food for off premises consumption, medical, medicine, and a few other things are not subject to the tax. I would ad housing to a certain limit to the list, clothing items below a certain dollar amount for the item, utilities up to a limit,and maybe a couple of other things. Since the poor spend most of their income on necessities, then the poor would largely escape taxation.

The would be a progressive tax on those who LIVE RICH, but lesser tax on those who live moderately.

It would also eliminate the need for all of those legions of income tax preparers and let them do something else more productive. Further, a national sales could use the existing sales tax collection system and eleminate most of the IRS.

It would also bring off the books money into the tax system. Many people have cash only income and don't declare the income for taxes. It would be taxed when spent.

Most opposition to it is knee-jerk.

[papau]

28. The Texas law is soundbite "ok"-but Vermonts is the real "progressive" and

the Vermont law does not replace an income tax.

You need an asset or land tax law, or an income tax that actually taxes investment income, or both, if we are to get close to fairness defined as those that use the government to gain/protect their assets the most also pay the most.

[ElaineinIN]

30. Getting rid of the IRS?

Doubtful. You couldn't use the existing sales tax collection system because it differs from state to state. Each state has different exemptions, different procedures, etc., Presumably, the federal system would have its own outlines: what is a sale? does it include an exchange? when does the sale occur, for example, if it were an installment sale? are there special rules for related parties? what are the exemptions--food? what is food? does it include supplements? does it include alcohol? are certain organizations exempt from sales tax (e.g., the current 501(c)(3) organizations)--if so, then the whole Exempt organizations section of the IRS stays. Are we including stock sales as "sales?" If so, do we continued to have IRAs, 401(K)s and the like that are "exempt". If so, what does this do to the rate of tax necessary to maintain revenue levels?

Not to mention the transition issues.

Its a pipe dream, sold to willing consumers (tax free) who hate the IRS so that getting rid is seen as a normative good, regardless of such minor things as efficient tax administration and the like.

[SharonAnn]

21. So the poor and middle class would pay all the taxes. Rich would

pay such a small fraction of their income and wealth that it would mean nothing to them. But, they sure wouldn't SPEND if the tax rate was 30%.

They'd get special exemptions written for them. You know, loopholes.

[punpirate]

22. Okay, let's take that argument about the rich having to spend...

... their money. Let's say that I make $5 million/yr in salary and investments, and, right now, because of good accountants, I pay about %20 in all federal taxes (the average at the top is actually less--about 17%). That comes out to $1 million/yr in federal taxes. I only need to spend about $500,000/yr to live very, very well.

Now, the tax law changes, but my salary and living expenses do not. I continue to spend my $500,000 per year, on which I pay a 30% retail tax. My annual taxes are now, under this tax plan, $150,000 per year. My taxes have been reduced by a factor of 7.

[JHB]

25. Here they go again

Enjoy the fireworks!
:popcorn:

[dcfirefighter]

26. I LIKE it

not the proposal itself, but because it makes people think about taxation - and how taxation effects productivity.

I like it because it offers an alternative to a convoluted income tax.

As progressives, we are own worst enemy when we allow ourselves to be constrained to an income tax when we consider radical tax reform.

Many progressives would rather see a wealth tax rather than an income tax - I feel like that this is a step in the right direction. The problem with a wealth tax, is that it indirectly taxes the wages of the labor that creates the wealth in the first place.

So we limit our tax to wealth that hasn't been created by labor: Land Values, Pollution 'rights', Extraction permits, Broadcast Licenses, Patent Values, etc.

[Cleita]

33. You would.

This is another way to make the poor poorer and the middle class, the poor class. I'm in favor of eliminating sales tax altogether. Some progressive states do fine without it like Oregon. Also, Oregon doesn't let you pump your own gas and guess what gas is cheaper there than in California?

[dcfirefighter]

53. Read why I like it

Sales taxes suck. Talking about radical tax reform is good.

[papau]

34. Indirect tax on labor is like company's share of payroll tax - - not real

burden on labor.

The theory is that wages would rises if the company's share of the payroll tax were eliniated.

With 8% Union in the US, who do they think they are kidding?

It may be treated as wages in doing product cost analysis - but it will not revert to the worker if removed.

A wealth tax on everything, with a $1 million dollar deduction, is a good starting point for a new tax system.

A flat tax of 30% with high per person and per return deductibles that included investment earnings at 100 cents on the dollar just like wahes, and perhaps had small limited in size charity and home interest deductions is also an excellent starting point.

Throw in a progressive Vermont style sales tax for the GOP and we have a package that we all can live with.

[dcfirefighter]

54. You are wrong

Wages would rise.

Not that the company would turn around and say, hey, here, have this portion of the tax we used to pay, but rather:

The cost of employing people would become cheaper -->
More people would start businesses, existing businesses would expand, a few jobs wouldn't be moved over seas, a few jobs would be done by hand rather than by machine ---->
So more people would be employed --->
So there'd be fewer un- & under- employed people ---->
So employers would have to 'sweeten the pot' to attract workers.

Most of the reduced cost would be enjoyed by the companies and their customers, some would be enjoyed by labor.

[Cleita]

29. Repukes throw this idea up every now and then.

It's another way to get out of paying their fair share of taxes. Let's face it the rich can only spend so much on bling, bling. The rest of their cash goes into investments.

On the other hand, the poor, working poor and middle class, would have to pay taxes on most of the necessities of life, so their percentage or share of the tax burden would be more than what the rich would pay out and there would be very little left to save if anything.

Also, I could see it as as causing a recession because people would scale down their spending.

[Swede]

31. A consumption tax is hard on lower and middle income earners.

And not so hard on the well off. Just what the Neocons want.

[mmonk]

32. Taxation without representation

for the poor.

[Name removed]

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[mmonk]

68. So what candidates are representing the poor?

Are they in every district?

[Joe Chi Minh]

35. Wasn't that what Stephen Forbes of the Top 1000 corporations

wanted? Flat taxes - so the poor could take some more of the tax burden from the rich. It's what Blair's been doing in the UK for years, and now their house of cards is a-tumblin' down, because so many people have been driven into debt and destitution. The pension age is, apparently, to go up to seventy. So much cheaper with less survivors to claim it.

[garybeck]

36. BAD IDEA

it is a talking point they are trying to lie their way around, that it will get the rich to spend more. B.S. it is a regressive tax that would hurt lower income people much more.

[triguy46]

37. A loser out of the box for the middle class.

[Name removed]

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[Lars39]

41. Food is taxable.

Sales tax is a regressive tax that hurts the poor.

[Name removed]

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[Lars39]

46. TN

My father lives in a county with one of the highest sales tax rates in the state, 9 3/4%. Clothing is taxed,too.

[papau]

49. Many states have limited food/clothing exceptions to their sales tax, but

it in no way solves the moving the tax burden from the rich to the poor problem

And where there are exceptions, they tend to be up to some dollar limit for clothes, and to tax certain kinds of food.

[raccoon]

66. I think you are lying.

"I have bought food and clothing may times and never paid tax on it."

Some states don't have sales tax on food. SO I've heard.

I know of no state that doesn't have a sales tax on clothes.

[Nicole]

70. Oklahoma taxes food

It doesn't matter if it's in a restaurant or I buy it from the grocery store to cook myself. All food is taxed & it's taxed at the full rate.

I know some states don't tax food, others tax it at a reduced rate.

I've never heard of any that don't tax clothing.

[papau]

48. Just about all your points are wrong - bad facts/assertions - while the VT

sales tax rules are quite progressive, those in Texas are barely progressive.

And the sales tax rate varies based on the exceptions from the sales tax - with a range of between 30% and 50%. There is no study that comes up with 20% as the rate to reproduce the current income tax take - or even reproduce the reduced post Bush tax cut for the rich tax take. And God forbid we end all income taxes with a sales tax - the payroll tax is capped so it hits the non-rich and we will not change that - thank you very much. A Social Security tax on all income, with increased benefits for the rich, solves all Soc Sec funding problems. But that is not a direction we want to go if we are GOP.

A wealthy person can not avoid a wealth tax - which is what I want. And even a flat income tax with flat per person and per return deductions would be fairer - more progressive than the current income tax.

Income tax loopholes are purchased from the GOP and can be closed. Indeed the Income tax could one day go back to taxing investment income on the same basis as wage income - at 100 cents on a dollar.

The Lux tax of the 90's proved how easy it is for the rich to avoid a sales tax.

Cutting back purchase of fuel to heat the house so as to save on tax is one hell of an idea ("I can choose to buy what I want and pay the tax accordingly. If I'm a little tight with cash this month I don't buy as much." is a joke - right?)

And your math proves why therate would be high - you get a tax break unless it is high - and the game is to get the money to run the gov - not to give a net tax break. But the rich will get a tax break - offset by the increased tax you will pay.

[raccoon]

65. I don't know where you live, but bread sure as hell is taxed

in SC.

"last time I checked bread wasn't taxable."

[ieoeja]

42. Ain't incentives grand?

According to rightwingers, people lose their incentive to make more money, invest etc if they have to pay a higher tax on their income.

According to these same rightwingers, people will not lose their incentive to spend money if they have to pay a higher tax on their sales.

And if you phrase it that way they look at you and exclaim, "exactly!" At which point you end the discussion as there is obviously no use in continuing.

[Name removed]

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[Bridget Burke]

What law says the employer must pay a living wage?

What makes you think the employer would pass on any savings to you?

Texas has high sales tax. Unprepared food is usually exempt; so is medicine. Everything else, including clothing, is taxable. We just cut school spending again.

I have no problem with the concept of income tax. It's less regressive than Sales Tax.

[papau]

52. Example's math is current wage less 200 plus 100 - a wage cut -Why

are you trying to sell this to a group that can actually do the math?

This line would work better at FR - on many levels.

[Name removed]

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[Bridget Burke]

59. Actually, Democratic Underground IS a "private" group.

People are tombstoned for being disruptors--but not just for disagreeing.

You will see a wide variety of opinions here. Since you've been a member since June, I'm sure you've already noticed.

Why is this the topic that's inspired you to finally begin posting?

[Name removed]

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[Bridget Burke]

64. I do my own taxes.

As a single renter with one source of income, it's easy. Or maybe I'm just smart! One year I did get a huge envelope, stuffed with forms & a letter informing me that I owed thousands. I called the IRS & after a long wait, actually spoke to an employee. She explained that my W-2 form was missing--the sometimes disappear when the mail is sorted. I faxed it in. End of problem.

I do wish the government spent taxes better. Less for war & corporate welfare. More for social & environmental causes. Which government programs would you like to cut?

Texas has sales tax out the wazoo. Unprepared food & medicine are exempt. That's it.

[Name removed]

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[papau]

60. One more time - we agree Income tax was never suppose to be a tax on wages

only income.

But to remove investment income from taxation is to make the "income tax" tax wages only income.

You are of course free to speak your mind here at DU. But it helps if we are all on the same fact page.

A Sales tax effectively removes investment income because the increase from middle class cost of living to the cost of living rich is not equal to the massive income increase one has in moving from middle class to being rich.

"Income tax is repressive the government get to decide how much you need to live instead of you. If they want more they just take it without regard to your needs" is interesting - I think we are discussing what form of taxation to raise money to run government is MORE REGRESSIVE.

The progressive income tax has the potential to less regressive than any other.

A flat income tax can be made into a progressive income tax by means of adding per person and per return deductibles, plus perhaps adding limited in size deductions or credits for home mortgage interest paid and charity giving. The payroll tax can be made a less regressive flat income tax if we eliminate the wage cap and tax all wages - and better yet, if we tax all income (wages plus investment income).

A sales tax can be made more progressive by - as in Vermont - heavy use of large exemptions for every day costs of living for the lower middle class and poor. But then it tends to not collect much money.

The Sales tax level needed to have a mildly progressive sales tax the only Federal tax is between 55% and 60% in the latest studies, if we are to take in enough money to run the government. If we want only to replace only the income tax and not be progressive we can get a rate somewhere in the 30's.

[The Whiskey Priest]

45. Sales tax is the most regressive tax invented

Progressives should not support that idea.

[Lars39]

47. Yep. Amazing what gets support on a progressive site, isn't it?

[seabeyond]

50. it would work for me. i dont need much and have lots of money

in savings that wont be taxed. a lot more of my dollar wont be taxed. take someone that goes paycheck to paycheck. they spend all their earned money on stuff to survive. all that will be taxed. a significant amount of my money will not be taxed

no. it isnt a fair system. the more you have, the more of a winner you are.

[WI_DEM]

51. Terribly regressive and would hurt the poor and middle class

the most. As it is now thanks to Clinton's Earned Income Credit the working poor pay little or no taxes but with a 30% sales tax they would feel the pinch badly. Lets say that a poor family buys groceries and pays $100--add on top of that a $30 tax!! forget it!

[mondo joe]

56. WORST idea. Regressive tax that hurts the poor and middle class most.

[kentuck]

58. I thought DUers were brighter than that....

:)

[ProfessorGAC]

61. He At Least Got The Percentage Right

I've seen such proposals as low as 15%, and any freshman highschool algebra student could do the math to prove that's ridiculously low.

However, there are several problems with such proposals.

First of all, like others mentioned, it's highly regressive. If you make $30k per year (no offense intended if you make more) you will likely spend nearly every dime of that to live. That means you pay $9k in taxes. That, of course, is 30%.

If i make $1 million per year, i could live a VERY luxurious lifestyle at $400k per year. That would cost me an extra $120,000. Against the million, that's only 12%. This means that not only is the tax now regressive, it's exceedingly so, because i pay 40% of YOUR tax rate, even though i live off of 20x the money!

The only way to mitigate this issue is to exempt the first X% of the money. But, there would never be a way for vendors and merchants to know who had exceeded that threshhold. So, the tax would have to be charged on every single purpose. For the person making $30k per year, they would run out of money after 8 months! So, in order to get that back, they'd have to file at least every quarter (not yearly) in order to maintain cash flow. Now the system is far more unwieldy and much easier for the tax cheats to go uncaught.

It's a silly idea, favored by people who actually believe nonsense like "progressive tax systems are unfair" or "if you have too many rates, it's too complicated." Those are ridiculous cop-outs and, btw, the sales tax idea is favored strongly by the Liberterian party. You sure you want to throw in with that bunch.
The Professor

[papau]

62. By the Way - I debated (briefly via call in) Prof Kotlikoff on NPR's

ONPOINT program (where I got the impression he was a nice guy despite being a Havard PHD!).

As others may not know, the MIT video URL above does not mean Kotlikoff is MIT. Indeed he is a Prof at BU whose claim to fame is a book - "The Coming Generational Storm: What You Need to Know about America’s Economic Future".

I am curious as to why he feels a sales tax would help reduce the National Debt.- or perhaps it was the sum total of debt in the US (the removal of the home interest deduction would explain the comment if that is what he meant).

[Name removed]

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[dkofos]

71. Stupid idea.